LATIN AMERICAN MARKETS: Brazil Stocks Hit As Commodity Prices Tumble

Brazilian equities dropped nearly 5% Thursday, sliding alongside regional equity markets, as investors dumped commodities and resource-related stocks as their fears about sovereign-debt troubles in Europe ramped up.

Commodity prices were hit as the U.S. dollar reached a seven-month high against the euro, pushing the dollar index (DXY: undefined, undefined, undefined%) up 0.6% to 79.85.

“The sell-off is simply to a reaction to the stronger U.S. dollar because of renewed fears of sovereign debt problems in Europe, in connection with Greece and also in connection with Portugal and Spain,” said Patricia Mohr, a commodity market specialist at Scotiabank Group in Toronto.

A stronger U.S. currency typically pressures oil, gold and other dollar-denominated commodities as it makes them more expensive for holders of other currencies.

The commodity-rich Bovespa index in Brazil slid 4.7% to 63,934.01, the steepest percentage decline since March 2009. None of the 65 stocks listed on the index produced price gains in Thursday’s session. The Bovespa is now down 6.8% for the year.

Shares of state-run oil giant Petrobras (PBR: 38.81, 0, 0%), slumped 5.1% as oil prices dropped nearly 5% to $72.85 a barrel. It was the worst one-day drop in crude-oil prices in more than six months.

In Portugal on Thursday, the cost of insuring the nation’s debt against default soared to an all-time high. On Wednesday, the European Commission gave cautious approval of Greece’s plan to slash its budget deficit over the next three years.

Back in Latin America, Argentina’s Merval index fell 3.7% to 2,248.83 as local shares of Petrobras fell 5.4% and steel-tubes maker Tenaris (TS: 43.19, 0, 0%) shares lost 3.2%. Banking stocks were also hit, led by Banco Macro (BMA: 25.62, 0, 0%), down 6.6%, a day after Argentina’s president unexpectedly nominated a political ally to head the country’s central bank.

Mexico’s IPC index finished with a 2.2% loss at 30,603.71, with shares of copper miner Grupo Mexico down 3.3% and mining concern Industrias Penoles down 1.4%. Copper for March delivery fell 3.1% to end at $2.88 a pound. Gold for April delivery slumped 4.4% to finish at $1,063 an ounce at the New York Mercantile Exchange.

Banking firm Grupo Financiero Inbursa stood as the lone advancer among the IPC’s 35 listed stocks. The shares finished up 0.9%.

Mexico’s IPC has lost 4.7% since the start of the year.

Meanwhile, shares of Telefonos de Mexico (TMX: 15.58, 0, 0%) stumbled 5% on Thursday after the fixed-line operator’s fourth-quarter results left investors disappointed.

The results were “mediocre,” wrote Rizwan Ali, head of research at Deutsche Bank, in a note to clients. Telmex’s earnings before interest, taxes, depreciation and amortization of $12.2 billion pesos was 7.3% below the broker’s forecast, resulting in margin of 41.2% compared with its estimate of 44.1%.

“Despite revenues in-line with our forecasts, 5% lower interconnection expenses were not able to offset 12% higher cost of sales and services,” wrote Ali.

In Santiago, Chile’s IPSA fell 2% to 3,774.20.

Among exchange-traded funds, the iShares MSCI Mexico Index fund (EWW: 46.03, 0, 0%) closed 3.8% lower and the iShares MSCI Chile Investable index fund (ECH: 53.42, 0, 0%) gave up 4.2%.

Brazil rate hike in March?

As equities in Brazil slid, yields on key interest-rate futures dropped after the minutes from last month’s meeting of monetary policymakers pointed to the possibility that a rate increase may be issued at the next meeting.

The minutes were “hawkish” and it appears that the “risks are now tilting in favor of a March start to the tightening cycle,” Win Thin, senior currency strategist at Brown Brothers Harriman, wrote in an note Thursday.

“It’s not a done deal, however, as the bank noted that its inflation forecasts are still close to the 4.5% target and that it would continue to monitor inflation and inflation expectations going forward,” he wrote.

The central bank’s most recent survey of economists showed the market had expected the Selic rate to end the year at 11.25%. The rate currently stands at a historically low level at 8.75%.

“However, in light of the [January] minutes, we would expect those expectations to rise next week. If no hike in March, then we think an April move is almost certain,” wrote Thin.

The central bank’s meeting minutes arrived a day before the release of Brazil’s benchmark inflation index for January. Inflation ended at 4.31% in 2009, according the IBGE statistics agency.

Itau Unibanco in a note to clients said the central bank’s meeting minutes spoke “loudly” about inflation risks, and reinforced its previous call for a rate hike at the policymaker’s meeting on March 17.

“No more talk of a slowly closing output gap. No more talk of benign inflation expectations. No more easy 2010 inflation. And no change in its baseline view of the fiscal outlook,” wrote Guilherme da N��brega, chief economist at Itau Unibanco.